A restrictive covenant is a provision in an employee’s contract with his or her employer that specifies a limitation—of a specified time, scope and geographic area—on the ability of the employee to work in the same occupation or profession upon termination of employment. Depending upon their reasonableness and compliance with specified legal standards that will be described in this article, restrictive covenants are enforceable in New York.
Where an employer finds it necessary to enforce a restrictive covenant against a former employee, and where irreparable injury arguably stems from the former employee’s violation of the restrictive covenant, the employer can seek immediate relief in the form of a preliminary injunction enjoining the former employee from working at the new place of employment. This request for relief coexists with the employer’s lawsuit for money damages and a permanent injunction against the former employee.
To the extent the former employee’s employment contract provides for arbitration as the dispute resolution mechanism, it is common for the contract to provide an exception where injunctive relief is sought. This creates a two-track process, in which the request for injunctive relief is sought in the courts and the underlying dispute is handled through arbitration. While this process is workable, it is a bit cumbersome given that the parties are litigating in two separate forums.
Changes in arbitral rules, however, may reduce the need for this dual approach. For example, effective Oct. 1, 2013, new rules of the American Arbitration Association provide for emergency injunctive relief directly to an arbitrator and prior to the commencement of arbitration proceedings for those parties who have contractually agreed to arbitration as their dispute resolution mechanism. It is anticipated that such rules will facilitate and compress the dispute resolution process where requests for preliminary injunctions are involved and concomitantly reduce the burden on courts to handle such matters. This article will address the interaction between restrictive covenants, preliminary injunctions and arbitrations as they have existed in the past and how it will be affected by new arbitral rules.
Enforceable in New York
Agreements restricting a person’s right to work or compete are not favored and therefore are strictly construed. See Morris v. Schroder Capital Mgt. Intl., 7 N.Y.3d 616, 620, 825 N.Y.S.2d 697 (2006). New York courts have long held that, because there are profound considerations of public policy that weigh against sanctioning the loss of a person’s livelihood, restrictive covenants that have the effect of preventing an employee from pursuing a similar position after termination of employment are disfavored by the law. Columbia Ribbon & Carbon Mfg. v. A-1-A, 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004 (1977); B.O. Tech. v. Dray, 40 Misc. 3d 1213(A), 970 N.Y.S.2d 668, 672-73 (Sup. Ct. 2013). A restriction on a former employee’s ability to work for a competitor is invalid unless the employee’s services are “unique or extraordinary” or if the job is considered a “learned profession” (such as medicine, law or accounting). BDO Seidman v. Hirschberg, 93 N.Y.2d 382, 389-90, 690 N.Y.S.2d 854 (1999); OTG Mgmt v. Konstantinidis, 40 Misc. 3d 617, 620, 967 N.Y.S.2d 823, 825 (Sup. Ct. N.Y. Co. 2013).
The law treats restrictive covenants involving professionals, however, more liberally. Restrictive covenants that reasonably prohibit, for example, a physician from competing with a former employer are considered enforceable as necessary to protect the legitimate business interests of the employing doctor or professional group. Gelder Medical Group v. Webber, 41 N.Y.2d 680, 394 N.Y.S.2d 867 (1977). “Covenants restricting a professional, and in particular a physician, from competing with a former employer or associate are common and generally acceptable…” 41 N.Y.2d at 683, 393 N.Y.S.2d at 870. See also Rifkinson-Mann, M.D. v. Kasoff, M.D., 226 A.D.2d 517, 517-18, 641 N.Y.S.2d 102 (2d Dept. 1996).
Regardless of that distinction, however, all restrictive covenants that restrict an employee’s ability to compete must meet the test of reasonableness. BDO Seidman, 93 N.Y.2d at 388-89. A restraint is considered reasonable only if it satisfies the following three-prong test: (1) it is reasonably limited in time and scope and is no greater than is required for the protection of the legitimate interest of the employer and to protect the former employer from unfair competition; (2) it does not impose undue hardship on or unduly burdensome to the employee; and (3) it is not harmful to the public. Id. at 389, 690 N.Y.S.2d 854. See Poller v. BioScrip, 2013 WL 5354753 (S.D.N.Y. 2013); Goodman v. New York Oncology Hematology, 101 A.D.3d 1524, 1526, 957 N.Y.S.2d 449, 452 (2012).
The test of reasonableness is fact driven and dependent upon the circumstances of the particular case before the court. BDO Seidman, 93 N.Y.2d at 388-89. The objective of this test is to prevent unfair competition while still leaving room for fair and unrestricted competition. Columbia Ribbon, 42 N.Y.2d at 499. See, e.g., Penny W. Budoff, P.C. v. Jenkins, 143 A.D.2d 250, 252, 532 N.Y.S.2d 149 (2d Dept. 1988) (enforcement of two-year, 10-mile radius restrictive covenant involving a physician). But see OTG Mgmt., 40 Misc. 3d 617 (noncompete clause unenforceable where employee’s work not unique and not considered a learned profession).
Enforceable Through Injunctive Relief
Where a former employer believes that the former employee is violating a restrictive covenant that had been contained in the employment agreement with the former employee, the former employer’s recourse is to seek a preliminary injunction to prevent immediately the former employer from continuing to work.
In New York, C.P.L.R. §6301 provides the source of statutory authority for the issuance of a preliminary injunction. A preliminary injunction will be issued pursuant to C.P.L.R. §6301 where a plaintiff demonstrates the following criteria: (1) it has a likelihood of success on the merits; (2) irreparable injury will occur absent a preliminary injunction; and (3) a balancing of the equities favors the movant. 35 New York City Police Officers v. City of New York, 34 A.D.3d 392, 826 N.Y.S.2d 22, 24 (1st Dept. 2006); IVI Environmental v. McGovern, 269 A.D.2D 497, 498, 707 N.Y.S.2d 107, 108 (2d Dept. 2000). Significantly, “[i]rreparable harm is injury that is neither remote nor speculative, but actual and imminent.” Bd. of Educ. of Roosevelt Union Free Sch. Dist. v. Bd. of Trustees, 185 Misc.2d 704, 710, 713 N.Y.S.2d 908 (Sup. Ct. Albany County 2000). See also Electrolux v. Val-Worth, 6 N.Y.2d 556, 565, 190 N.Y.S.2d 977, 984 (1959) (requiring immediacy). Similarly, if a plaintiff has an adequate remedy at law and can be fully compensated by a monetary award, injunctive relief will not lie. Roushia v. Harvey, 260 A.D.2d 687, 688, 688 N.Y.S.2d 706, 707 (3d Dept. 1999). Price Paper & Twine v. Miller, 182 A.D.2d 748, 749, 582 N.Y.S.2d 746 (2d Dept. 1992).
In balancing the equities, the court must take into account the harm that each party will suffer in the absence or face of injunctive relief. Gerald Modell Inc. v. Morgenthau, 196 Misc. 2d 354, 363, 764 N.Y.S.2d 779, 786 (Sup. Ct. N.Y. Co. 2003). The party requesting the injunction must show that the burden caused to the defendant by the imposition of the injunction is less than the harm caused to the plaintiff by the defendant’s activities. Edgeworth Food v. Stephenson, 53 A.D.2d 588, 588, 385 N.Y.S.2d 64 (1st Dept. 1976).
Preliminary Injunctions in Aid of Arbitration
Where a contract provides for dispute resolution through arbitration, rather than litigation, it is common for such contracts to authorize an exception to the arbitration requirement by permitting the parties to seek injunctive relief through the courts. New York law expressly provides for such relief through a special proceeding. C.P.L.R. §7502(a).
C.P.L.R. §7502(c) provides that a court “may entertain an application for…a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state,” and that the provisions of article 63 of the C.P.L.R. are applicable to such a request. To the extent the arbitration has not yet commenced at the time of the request for a preliminary injunction, the statute mandates that such an injunction will be deemed null and void if the arbitration does not commence within 30 days of the issuance of the injunction (unless the court extends that time frame for good cause). See Sierra USA Commc’ns v. Int’l Tel. & Satellite, 14 Misc. 3d 528, 824 N.Y.S.2d 560 (Sup. Ct. N.Y. Co. 2006) (court can extend time frame even after expiration of 30-day period). Thus, statutory law provides an avenue for injunctive relief through the courts prior to commencement of an arbitration. CanWest Global Commc’ns v. Mirkaei Tikshoret, 9 Misc. 3d 845, 862, 804 N.Y.S.2d 549, 563 (Sup. Ct. N.Y. Co. 2005). Courts are also authorized to issue preliminary injunctions in aid of arbitrations where foreign parties are involved and even where the arbitration is conducted outside of New York. Sojitz v. Prithvi Info. Solutions, 82 A.D.3d 89, 93, 921 N.Y.S.2d 14, 17 (1st Dept. 2011).
A court may issue a preliminary injunction in aid of an arbitration where the movant establishes that the arbitration “award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.” C.P.L.R. §7502(c). See, e.g., New York City Off-Track Betting v. New York Racing Ass’n, 250 A.D.2d 437, 439, 673 N.Y.S.2d 387, 389 (1st Dept. 1998). In assessing whether to grant a preliminary injunction in aid of arbitration, however, a court should additionally examine the other three traditional factors attendant to the issuance of injunctive relief, i.e., likelihood of petitioner’s success on merits, danger of irreparable harm to petitioner. SG Cowen Sec. v. Messih, 224 F.3d 79, 83 (2d Cir. 2000); Invar Int’l v. Zorlu Enerji Elektrik Uretim Anonim Sirketi, 86 A.D.3d 404, 405, 927 N.Y.S.2d 330, 331 (1st Dept. 2011); Advanced Digital Sec. Solutions v. Samsung Techwin, 53 A.D.3d 612, 613, 862 N.Y.S.2d 551, 552 (2d Dept. 2008).
Injunction Requests Directly to Arbitrators
The validity of restrictive covenants has long been an issue resolved by arbitrators. See, e.g., Matter of Pine St. Pediatric Associates (De Agostini), 174 A.D.2d 804, 570 N.Y.S.2d 740 (3d Dept. 1991) (arbitrator’s determination after a hearing enforcing restrictive covenant upheld). Disputes involving restrictive covenants of employment can always be, by consent of parties, submitted to arbitration. Matter of Sprinzen, 46 N.Y.2d 623, 632, 415 N.Y.S.2d 974 (1979); Riccardi v. Modern Silver Linen Supply, 45 A.D.2d 191, 356 N.Y.S.2d 872 (1st Dept. 1974).
Similarly, arbitrators have the power to issue permanent injunctions following a hearing ( Matter of Sprinzen, 46 N.Y.2d 623, 415 N.Y.S.2d 974 ), and the right and authority, in governing the proceedings before them, to grant provisional remedies such as preliminary injunctions. Park City Associates v. Total Energy Leasing, 58 A.D.2d 786, 396 N.Y.S.2d 377, 378 (1st Dept. 1977); J. Brooks Sec. v. Vanderbilt Sec., 126 Misc. 2d 875, 876, 484 N.Y.S.2d 472, 474 (Sup. Ct. N.Y. Co. 1985). See also Lepercq De Neuflize & Co. v. Helmsley Enterprises, 1992 WL 12665505 (Sup. Ct. N.Y. Co. 1992).
Most importantly, parties have the ability to seek injunctive relief directly from an arbitrator prior to the commencement of the arbitration itself. For example, the Commercial Arbitration and Mediation Procedures of the American Arbitration Association (AAA), effective Oct. 1, 2013 (the Rules), delineate a detailed procedural roadmap providing for such an option. (The Rules also expressly endow an arbitrator in a pending arbitration the authority to order injunctive relief. R-37.)
Commercial Arbitration Rule R-38(b) (entitled “Emergency Measures of Protection”) provides that a party that requires emergency relief before the formation of a panel must inform the AAA and the other parties in writing of the (1) nature of the relief sought; (2) the predicate for the claimed emergent nature of the application; and (3) the basis for the party’s entitlement to the relief sought. To expedite this process this notice may be provided by facsimile, email or “other reliable means.” The movant must also certify that the other parties were served or, where a party could not be served, a statement of the good faith measures taken to provide such notice.
The process, as articulated in the Rules, should move relatively quickly towards resolution. The AAA must designate a single emergency arbitrator within one day of notice being provided by the movant to preside over the emergent application. R-38(c). The emergency arbitrator must disclose immediately any reasons or facts that may serve to disqualify the arbitrator, with challenges made to the suitability of the arbitrator required to be made within one business day of the parties being informed of the identity of the arbitrator and his or her disclosures.
Within two days of being designated to serve, the emergency arbitrator must delineate a schedule for consideration of the request for an injunction (or other emergency relief) that ensures the parties an opportunity to be heard on the issues either verbally or in writing. The emergency arbitrator is authorized to rule on other issues, including his or her own jurisdiction.
The standard for the issuance of emergency relief is similar to that found in decisional law under C.P.L.R. §7502. R-38(e) states that, “[i]f after consideration the emergency arbitrator is satisfied that the party seeking the emergency relief has shown that immediate and irreparable loss or damage shall result in the absence of emergency relief, and that such party is entitled to such relief, the emergency arbitrator may enter an interim order or award granting the relief and stating the reason therefore.” Other than modifying any award issued for emergency relief, the emergency arbitrator’s power to act ceases upon the formation of the panel that will hear the underlying dispute between the parties (unless he or she becomes a member of the panel upon agreement of the parties). R-38(f). Importantly, the existence of this avenue for relief does not preclude a party from seeking injunctive relief through the courts. R-38(h).
The availability of arbitral rules that expressly provide parties the ability to seek preliminary injunctive relief from an arbitrator prior to the commencement of the underlying arbitration should facilitate and expedite the dispute resolution process where injunctive relief is sought. Allowing parties to pursue injunctive relief and their underlying claims in one forum should result in a less cumbersome and disjointed effort. Time will tell if this proves to be so.
Andrew Zwerling is a partner-director at Garfunkel Wild, and a member of the firm’s litigation and arbitration practice group, and an arbitrator for the American Arbitration Association and American Health Lawyers Association.